Wealth Strategies Journal Blog

Auction-Rate Securities Wealth Transfers?

The recent evaporation of liquidity in the Auction-Rate Securities (ARS) market has led to significant frustration for many high-net-worth families and individuals. Over the past several years, ARS became an important cash management option for wealthy individuals, financial institutions, funds, and both public and private companies. Now, the asset class has suddenly become, in the colorful phrase of Liz Moyers, about as illiquid as granite. However, as adversity has a tendency to lead to opportunities to the bold, a number of wealth planners have begun planning for transferring these securities to family trusts. Clearly, since these securities are no longer as liquid as they were expected to be when issued, they require higher yields to maintain their values. For some ARS, though, the maximum yield is set as such a low rate, that a significant value reduction has been the result. This, in other words, is a classic "lack of marketability discount." A secondary market has also arisen, providing investors with the ability to sell their securities (and investors such as distress-funds with the opportunity to make purchases at a discount from par). One of these marketplaces, the RSTN, has experienced significant inflow of new positions over the past few weeks. Discounts depend on a number of factors, including yield, the attitude of the issuer towards refinancing, the likelihood of the auction markets recovering, the maturity of the debt (or lack of a maturity date in the case of auction-rate preferreds, or ARPs), and other factors specified in each prospectus for each tranche. And where significant discounts are to be found, significant wealth planning opportunities tend to arise as well.

IRS Announces Groundbreaking OPR Settlement with Attorneys

The Internal Revenue Service's Office of Professional Responsibility (OPR) announced today a settlement agreement with Michael C. Ormsby and David O. Thompson, in connection with a $31 million municipal bond issuance involving River Park Square in Spokane, Washington in 1998 handled by the former firm of Preston, Gates & Ellis LLP.

OPR raised allegations, including the scope of due diligence, under Treasury Department Circular 230 sections 10.22, 10.29, 10.34, and 10.51(j), with respect to the tax aspects of the bond opinion rendered in the matter. The Respondents filed answers denying the allegations. In the settlement, the attorneys agreed to comply fully with practices and procedures implemented by their current firm in its public finance group, including but not limited to (i) submitting new matters to a review and approval process, (ii) completing questionnaires and checklists to document the due diligence activities undertaken in the matter, and (iii) following practices and procedures established by the firm's opinion committee for municipal bond opinions. The attorneys also agreed that, for a period of 18 months from the date of settlement, any opinion proposed to be delivered by the attorneys in connection with certain specified financings will be reviewed and approved by the leader of the public finance group, who is also a member of the firm's opinion committee. OPR believes the settlement will result in enhanced oversight of the state and local bond practice of these attorneys and will help assure their compliance with the applicable requirements of Circular 230. OPR agreed that implementation of such practices and procedures is appropriate for municipal bond attorney practice.

OPR and the attorneys agreed that the settlement does not constitute any admission of wrongdoing by, or a sanction of, the attorneys.

The Office of Professional Responsibility stated that it was pleased to have reached an agreement that demonstrates its commitment to ensuring bond lawyers comply with Circular 230 when involved in tax-exempt municipal bond issuances. Such efforts are an outgrowth of OPR's enhanced oversight of Circular 230 practitioners.

Posted by Lewis J. Saret, General Editor, Wealth Strategies Journal.

On the Web & In Print

Wills Trusts & Estates Prof Blog

Self-Help Estate Planning:  "In Get Yourself a Will: Here's a Way, USA Weekend, Nov. 30-Dec. 2, 2007, at 28, Sharon Epperson tauts the benefits of self-help estate planning techniques."  (See also the post regarding this topic on the Ohio Trust & Estate Blog, entitled "You could do open heart surgery on yourself, too, but that doesn't mean it's a good idea."

College Prepares Your Will for $1,000 Bequest: "Lindenwood University in St. Charles will pay for alumni to have their wills prepared, provided they bequeath at least $1,000 to the college in return."

Sizable Contingency Fees Are Not Just for Personal Injury Cases: "New York First Department has ruled that a 40% contingency fee was not unconscionable in an estate litigation case where the law firm had already received $18 million in hourly fees and $5 million in gifts for the partners."

Wealth, Children and Responsibility:  "Many...are now taking steps to ensure that their children do not have access to their wealth until they are able to handle it responsibly."

The Treasury's Office of Tax Analysis Releases Paper on Gift Tax

The Treasury issued OTA Paper 100 on November 1, 2007.  The paper, authored by David Joulfaian, claims to "shed light on the inner workings of the gift tax," by detailing its history, structure, and revenue effects.  The Paper also points out that the divergence between the tax treatments of lifetime gifts and bequests provides taxpayers with varying behavioral incentives.  It concludes that the gift tax is not effictively coordinated with the income tax or the estate tax and that its features should be re-examined.  U.S. Treasury, Office of Tax Analysis Paper 100, "The Federal Gift Tax: History, Law and Economics," David Joulfaian (Nov. 2007).

Now, if only the Treasury would issue a similarly clear paper to shed light on the inner workings of the GST...

Posted by Kiersten Jensen, Estate and Gift Tax Developments Columnist, Wealth Strategies Journal.

On the Web & In Print

Wall Street Journal Blogs

Master the Universe?  First Master the Tax Code. For those young associates and law students out there interested in rising to the top ranks of an elite investment banks, we just want to say two words to you - just two words: tax law.

Phil Knight Goes Back to School. Nike founder and billionaire, Philip Knight, goes back to school to at Stanford, primarily taking classes on creative writing.

A MySpace for Millionaires. The online social-networking boom has joined the wealth boom to create a new industry: Web networks for the rich. The idea is simple. Wealth likes to be with wealth, and with the Web creating new tools for connecting, the rich can expand their social and business networks by creating gated communities online.

Is the Law-Firm Bonus System Economically Irrational? In his Sunday DealBook column, the NYT’s Andrew Sorkin delivers an indictment of the way Big Law pays its associates. Loyal Law Blog readers are hip to the lemming-esque way in which corporate law firms award bonuses. Last month Cravath announced its largesse, which ranges from $45,000 to $110,000 depending on seniority. And, as sure as night follows day, the usual suspects – Debevoise, Sullivan, Simpson, etc. – followed suit.

Business Week

What to Do When a Customer Complains. An attorney representing a New York City dry cleaner suing a customer for defamation offers advice on responding to client complaints.

 

Posted by Lewis J. Saret, General Editor, Wealth Strategies Journal.